Curb Spending and Get Productivity Up

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Business to Government: Curb Spending and Get

Productivity Up

“A select committee inquiry into pressures on inflation and the export sector will be a waste of time if its focus is to be on monetary policy”, Roger Kerr, executive director of the New Zealand Business Roundtable, said today.

“The main problem is not monetary policy. The problem is other government policies that are creating acute imbalances in the economy, retarding productivity and economic growth, and not supporting monetary policy.”

Mr Kerr said there was nothing wrong with New Zealand’s monetary policy framework or mechanisms. Interest rates are not a ‘blunt instrument’. They are the tool used successfully by central banks around the world to keep inflation in check. Monetary policy is a broad-based instrument that is ill-suited to Muldoon-style ‘fine tuning’ of particular sectors such as housing. Monetary management was not problematical in New Zealand in the 1990s once fiscal discipline was established and maintained.

The search for so-called ‘alternative instruments’ was unnecessary and futile.

The Treasury and the Reserve Bank reported on the issue and came up with no useful proposals. At a Reserve Bank conference on the subject last year, a leading international expert Willem Buiter said the report was “a little chamber of horrors” of regulatory and fiscal interventions that would “fail to stabilise anything of value while creating massive distortions, disintermediation and rent-seeking behaviour.”

Similarly, in its report released last week, the OECD said that the case for alternative instruments “is not compelling, as they are difficult to develop and enforce, and could blur the responsibilities of the fiscal and monetary authorities.”

“This sideshow should stop”, Mr Kerr said. “Ideas such as changing tax rules or banks’ capital adequacy ratios have nothing to do with the problem. They could have a one-off effect on prices but would have no impact on inflation, which is a persistent rise in the general level of prices.

“It is well established that inflation is a monetary issue”, Mr Kerr said. “It is about too much money chasing too few goods.”

“The Reserve Bank has full medium-term control over money. Commentators have suggested it was remiss in cutting interest rates unduly in the last economic cycle and being slow to tighten in the current cycle. It has also placed far too much emphasis on house price increases – housing is an asset like stocks and bonds and responds to real economic factors, and it is just one part of the CPI.”

Mr Kerr said that by far the greater problem was “too few goods” – the result of government policies that have all but killed productivity growth – and the pressure that ballooning government spending is putting on domestic sector inflation and undermining export competitiveness. Monetary policy is unable to shelter the export sector from the impact of excessive government spending, state sector wage increases or government user charges.

“A rebalancing of economic policy is urgently needed”, Mr Kerr said. “This has to focus on productivity-raising measures such as staged tax reductions, freer employment law, less regulation of the business sector, and more private sector involvement in infrastructure and government business enterprises.

“Above all it needs to focus on excessive and wasteful central and local government spending. This means reducing the growth in spending to below the growth rate of the economy so that more resources are available to the productive sector. It doesn’t mean cuts in priority spending areas. To date the government has been spending far too much of the dividends of economic growth and leaving too little to households and businesses.

“A select committee is not needed to explore these obvious solutions. The government could implement them in a supplementary budget and independently. The message to it should be: ‘curb spending and get serious about productivity’ ”, Mr Kerr concluded.

ENDS

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